Dividend Aristocrats: Time to Buy HCP Inc.?

Sunrise facility, Beverly Hills. Source: HCP.

Dividend stocks are more popular than ever, and income-hungry investors have looked to stocks that pay reliable dividends as a replacement for lower-yielding fixed-income investments. HCP (PEAK -0.17%) is one of just a few dozen stocks to qualify to be a member of the Dividend Aristocrats, which is a group of dividend stocks that have raised their payouts to shareholders for 25 or more years straight. Dividend investors look closely at Dividend Aristocrats to meet their needs for current income and future growth.

HCP is a real estate investment trust that specializes in owning and managing assets related to the healthcare profession, including hospitals, medical office buildings, nursing facilities, and senior housing developments. With dependable cash flow from its customers and the benefits of the REIT structure for tax purposes, investors enjoy better dividend yields from HCP than much of the rest of the market. But are HCP shares a smart buy right now? Below, we'll take a closer look at HCP.

Dividend Stats on HCP

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

Can HCP really keep growing?
HCP shares have performed extremely well since the financial crisis, hitting an all-time record high in mid-2013. Since then, though, the REIT has struggled, and the share price has dropped by more than a quarter in the past 15 months or so.

Medical City facility, Dallas. Source: HCP.

Much of the downturn for HCP has come from broader macroeconomic factors that apply to all real-estate investment trusts. Because of their high levels of income, REITs tend to be sensitive to the prevailing direction of interest rates, and what prompted last year's slide was fear that the Federal Reserve's quantitative easing program would end. Yet even though the Fed's tapering of QE has run on schedule so far this year, interest rates have stabilized, and that has helped HCP recover some of its lost ground from 2013.

Yet from a fundamental perspective, things continue to look promising for HCP. An aging population will likely need more services from senior housing, nursing facilities, and outpatient medical care, and the types of real estate that medical professionals have to have in order to provide the services their patients need makes it difficult for companies that don't specialize in health care real estate to enter the field. The drop in share price makes HCP's multiple to funds from operations look especially attractive.

HCP also helps investors avoid a big threat to the health care business: cuts in government reimbursements. Hospital companies Community Health (CYH 2.88%) and HCA Holdings (HCA 2.73%) have to deal with the constant threat of reductions in what they receive from Medicare and other government programs. HCP has some exposure to these reductions, but historically, it has done a better job than many in attracting private-pay clients who cover their own bills.

HCP Dividend data by YCharts

Will HCP's dividend keep growing?
One thing dividend investors must remember is that as a REIT, HCP is required to pay out at least 90% of its earnings in the form of dividends. As a result, HCP has much less of a margin of safety to protect it from potential earnings declines than a stock that has a lower payout ratio. Current dividend levels equal to 97% of earnings should put the 5%-plus yield into context.

Nevertheless, HCP does offer both solid income and the prospect for further growth as America's population ages and needs more medical services. With a track record of getting through slow periods before, HCP looks like one of the more attractive Dividend Aristocrats right now and should remain so for the foreseeable future.